Smart & Final's Q1 Sales Up, but Operating Income Down

LOS ANGELES -- Smart & Final Inc. yesterday reported sales for its 12-week first quarter ended March 27 of $427.6 million, a rise of $4.1 million, or 1.0 percent, from first quarter 2004 sales of $423.5 million.

The company's 2004 first quarter sales included an estimated $40 million positive effect of a labor dispute involving Albertsons, Ralphs, and Safeway, the three biggest Southern California supermarket chains, which was resolved in the prior-year period. On a two-year basis over the 2003 to 2005 period, first-quarter comparable-store sales have increased by a compounded annual rate of almost 9 percent.

Income from continuing operations was $3.5 million for the first quarter of 2005, as opposed to $6.6 million for the first quarter of 2004, which included the positive effect of the labor dispute.

President and c.e.o. Etienne Snollaerts noted in a statement: "Our 2005 first quarter was both gratifying and challenging. We are pleased that despite extraordinarily severe weather in our key Southern California market, we were able to show overall continued growth in comparable store sales. However, our operating margins and expense rates were unfavorably impacted, resulting in an overall decline in operating income."

He continued: "Sales in our geographic regions outside of Southern California continued steady growth, and our first-quarter comparable average transaction increased over 5 percent vs. the first quarter a year ago, to almost $42 per transaction. We view both of these factors as good indicators of our value retailing position."

Referring to the heavy rains suffered during the first quarter of 2005 e.v.p. and c.f.o. Richard N. Phegley characterized the period as "good sales despite terrible weather" at the start of the company's conference call yesterday, explaining that the downpours led to Smart & Final's first decline in customer visits in several years. According to Phegley, the decline was "roughly 4 percent" across the company and about double that in the badly affected Southern California market.

Phegley attributed Smart & Final's sales growth to the its ability to limit its sales losses in Southern California, as well as "very good growth" in the company's Northern California, Pacific Northwest, and Arizona/Nevada markets. Sales growth was also supported by an increase in average transactions of more than 5 percent, he noted.

Later on in yesterday's conference call, Snollaerts took the floor to discuss such topics as Smart & Final's ongoing promotional activity to maintain sales momentum, mainly through aggressive pricing and the institution of 10-day and three-day sales, and the implementation of a new supply chain software, which was expected to be fully deployed by midyear and which, Snollaerts hoped, would result in "improved labor productivity and throughput, bringing distribution costs into better balance with sales."

Chairman Ross E. Roeder emphasized that Smart & Final would be more appropriately compared with specialty/warehouse retailers than to supermarkets, adding that the company's future was bright, since it was "consistently able to grow sales in a low-growth industry," and had done so for several years.

As a percentage of sales, gross margin from continuing went down to 15.9 percent for the first quarter of 2005, compared with 17.2 percent for the first quarter of 2004. This decrease in margin rate was primarily attributable to higher distribution costs and slightly lower product margins.

Smart & Final opened three stores during the 2005 first quarter, in Tacoma, Wash.; Kent, Wash.; and Van Nuys, Calif. The company operated seven more stores at the end of the first quarter of 2005 than at the end of the first quarter of 2004. According to Snollaerts, 15 new stores in total will open in 2005 in both store concepts, Cash & Carry and Smart & Final, and across the company's existing geographic region. Snollaerts said that the "steady opening pace" of 15 stores a year would be held to for the "foreseeable future." Among the new stores planned for this year were two more Cash & Carry outlets in Southern California, following the opening of the first such store in the region last year, which Snollaerts noted was performing well.

Smart & Final, Inc. currently operates 237 nonmembership warehouse stores for food and foodservice supplies in California, Oregon, Washington, Arizona, Nevada, Idaho, and northern Mexico.
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